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Building A Real Estate Portfolio: A Beginner’s Guide

Andrew Carnegie, an industrialist, once said, “90% of all millionaires become so through owning real estate.

July 29, 2020
in Business, How To, Marketing
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Andrew Carnegie, an industrialist, once said, “90% of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined.”

Although Andrew said this decades ago, this statement is true today, as well. Apart from wholesaling and flipping houses, which are all the rage these days on TV commercials, there are several other activities that could make you money through your real estate investments. Although if you’re keen on earning short-term profits, then these realty ideas are surely for you. Otherwise, you can plan to reinvest your money and earn a long-term rental income from house flipping, as well.

Nonetheless, this article is not about any of these ideas, but rather building a portfolio that could help you assure a wealthy retirement lifestyle. Unlike stocks and bonds, you can fund your retirement without having to worry about many of the common factors that scare the majority of investors. And all of this could be done if you could manage to invest in multiple rental properties, given that all of them generate positive cash flow.

Particularly, when you’re young it would be easier for you to buy your first rental property. Shortly after, you can plan to grow your real estate portfolio, and earn positive returns until you retire. On the other hand, if you’re already close to retirement, investment in lower-yielding properties would be a wiser move. This could help you convert your existing assets with no or little returns into a regular income source for your retirement. In short, it’s never too late to start building your real estate portfolio.

Factors You Should Consider When Investing In Residential Rental Properties

You should understand that it is difficult to get all of these factors working for you in perfect order, right from the start. Of course, you should be concerned about maximizing each of these factors to gain the best possible returns on your investment. But at the same time, there could be instances where one of these factors could be more important than others.

Nevertheless, here are the factors that you should be considering when investing in a residential rental property.

  • Neighborhood

It is the foremost factor that would affect your returns on investment. You wouldn’t want your property to be right next to a supermarket for obvious reasons- there’ll be no peace around the location. On the other hand, you wouldn’t want to be too secluded from the daily necessities, after all, no one would like to travel miles to run daily errands. You should rather pick a peaceful neighborhood with a lush greenbelt in vicinity and accessibility to the local markets.

  • Market Variables

Well, location or the neighborhood is a subdivision of this factor only. The place where you buy your residential rental property should not have stiff competition. To put this into perspective, consider if there would be a lot of rental properties around your own- you would obviously struggle to rent out your property. But at the same time, if there are no rental properties in the neighborhood, it is very likely that your prospective tenants might not even search for you. According to this beginner’s guide, https://fibyrei.com/real-estate-investing-for-beginners/, you can consider house hacking for your first rental property investment. It would not only help you get the idea of the market but also support you to pay off your mortgage. So, it’s clearly a balancing act between supply and demand.

  • Levied Taxes

Property taxes are one of the major expenses, apart from maintenance and property management. It is noteworthy that some areas are hotspots for rental properties, by default, whereas, some are not so preferable. This is mostly because of the local amenities that are available around your rental property. Notably, the taxes are also higher in these localities. If only, you could manage to keep up with a monthly cash flow that leaves you with net profits after making the necessary expenses and paying the taxes, you’re surely on a positive note.

  • Expectations

You should also consider appreciation in your property over time. It is important that you have such expectations from your rental property as, with aging properties, maintenance costs also increase. And you wouldn’t want to be caught up in the middle of low income and high expenses tug. Usually, there are two ways to tackle this problem. One is surely by expecting an appreciation in the property value over time. And the second is by paying off your mortgage. By far, if you could manage these two acts intelligently, you can expect to build equity in rental property.

Besides these considerations, you should also take into account the age of your property, the necessary repairs over time, and if there need to be any improvements made on the property.

What is the procedure to acquire a rental property?

Assuming that you have arranged for the down payment and are ready to make your first investment, you’d still want to make an informed decision. Although the aforementioned factors can help you with this objective to a large extent, you would still need a roadmap to secure your financial investment.

Here are some of the steps that you can follow in order to make an informed purchase.

1. Identify Your Market

You might already have an idea about the location or the neighborhood where you wish to buy your first rental property. However, you should still take out time to assess other possibilities. Thorough research of the market can broaden your understanding and help you make the right investment. You should try to identify what sort of properties usually make higher sales. Besides, you can also try to find areas where properties are selling like hotcakes. Usually, these hotcake neighborhoods are where other investors, notably more experienced ones, are likely to be investing. But, as you do your research, make sure that you keep a check on your budget. After all, you wouldn’t want to be making high-risk investments and that too with a lot of money in fixed assets.

2. Learn Property Valuation

Real estate agents usually make a comparative market analysis before they invest in any realty. This is to ensure that their investments are likely to prove good for profitable reasons. Property valuations are not just indicative of the market price but also gives an idea about the future appreciation of the assets. Most of the experts would suggest buying a property that is below the market value. Doing so would guarantee profits and make it easier for you to pay off the mortgage as well.

3. Go Through The Competition

Another good way to conduct market research is by going through the advertisements. You can follow both print media, as well as, online listings such as Craigslist. After researching the average rentals within a neighborhood, you can wisely place your property into the market. Besides, you should also check if the owners are offering any other benefits to their tenants or customers such as free months, or no lock-in periods, or waving off the security deposits. All of these factors can help you gain an insight into how much you can expect from your investment.

4. Prepare For Necessary Expenses

Apart from estimating the market value of your property, you should also keep a note of the routine expenses. Usually, these necessary expenses would include taxes, insurance, monthly repairs, and so on. These expenses are applicable to every property in an area, irrespective of the size and purpose. Mistaking with your budget at this point is like throwing away the easy money that you could have earned profitably.

5. Make Sure To Bargain Before Nailing A Deal

For long-term profits, you should learn to bargain and negotiate before signing any deal. This is also a part of the competitive market analysis where you’re trying to buy a property below the market value. Obviously, you should be bargaining for a lower price to pay for a property with respect to the average market value.

You can use these aforementioned steps to find the right property in the right location. But you’ll need something more to nail the right deal.

  • Look Out For Cheap Deals

It is noteworthy that not all the properties in any neighborhood sell around the average market value. You need to be on the lookout for deals that you can bag at much cheaper prices than anticipated. Some of these properties would include pre-foreclosures, owners selling their properties in distress, and flip-flop investors. All of these sellers are usually in haste to sell off their properties and that too at an incredibly lower price. It is noteworthy that you should do a background check on these properties before making the deal.

Building a portfolio on real estate is not a walk in the park. But, if you could make the right decisions at the right time, you can surely benefit from your investments in the long run. All you need to do is recognize your niche and keep following it.

In the end, make sure to keep the right balance between your assets, liquid cash, and mortgages. Failing to keep up with this might be the only mistake that could take you for a spin.

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